Insights by Nitor

Closing the Loop with Invoice and Payment

Posted by Molly Wilson on Nov 9, 2016 12:48:13 PM
Molly Wilson
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How many times have you worked in a setting where you were the end of the line of a long, multi-department initiative? All of the workflows and processes linked together and each employee along the way had time to fully Procurement Machine Closing the Loop with Invoice and Paymentcomplete tasks. This well-oiled business machine created an easy, almost automatic, response from you to quickly close the loop. 

This is a nice story and every employee’s dream. But realistically, when the initiative reached your desk, the well-oiled machine had probably already broken down somewhere along the way and lost a gear or two. Within Nitor Partners’ 8-Element Procurement Transformation Process, the seventh element, Invoice and Payment, helps close the loop.

All the necessary data and processes should already be established to make receiving the invoice and paying the vendor an automatic step. Spend Analysis provided insight, Category Management established the vision, Strategic Sourcing selected the appropriate suppliers, Contract Management negotiated the scope, pricing and terms and finally, the correct POs have been sent out through the eProcurement system. (Please review the previous blogs in the 8-Element series to learn more about these integrated steps). Unfortunately, like any other business process, automatic invoice approval and payment will remain a dream unless different issues along the way are addressed.

EProcurement solutions in technology and process development have highlighted the need for changes within Accounts Payable. Procurement can make an impact on AP in the following two areas:

  1. Invoice Automation - As companies are processing up to millions of invoices each year, invoice submission has been on an upward trend towards fully electronic transactions. However, paper invoicing will continue to be utilized and a process needs to be established to identify the best handling method, and which invoices will become electronic and at what point in time.
  2. Sales and Use Tax Automation - A tax audit and the associated penalties can be a large pitfall for companies. The need to calculate taxes in real-time is extremely valuable to avoid these consequences.

Companies can have thousands of invoices coming in at any given time. With that volume of work, it is not surprising that the machine can break down. Here are a few of the most common issues we see companies dealing with in the market today:

  • Variety of Invoices - While vendors often create invoices off the client’s Purchase Orders, that is not always the case, nor without faults. In addition to POs, invoices can be created from contracts or a matching process, and credit memos and tax must also be addressed. With all the different invoice types as well as different dollar amounts and commodities, companies can easily become overwhelmed as how to best handle all of these situations. It is important to learn how to best consolidate all of these different invoice use case scenarios into an appropriate list of major transactions.
  • Cash Management - AP departments have a variety of different treasury and finance options available to pay suppliers. These different options can bring significant benefits to the organization such as increasing the amount of working capital. Companies often find themselves so overwhelmed with the original workload of paying the invoices in a timely manner; they do not have the resources or time to consider these different options.
  • Segmentation - Most companies are primarily relying on paying their invoices through payment terms. While payment terms are beneficial for many scenarios, they are not always the best option. For example, P-cards are a great option for vendors with high volume and low dollar amount. Segmenting suppliers into different groups and determining the best methods of payment is a necessary step in streamlining the invoice and payment process.
  • Regulatory - Sufficient resources are often times not allocated to review and ensure the company is adhering to regulatory requirements.
  • Approval Time - Many times a lot of effort will be put into negotiating contracts and creating early payment programs to benefit the organization. These savings will not be realized though if invoices are not approved in the negotiated time.
  • Awareness - The opposite side of the above bullet is when the organization has already created an efficient invoice approval process, but the approved invoices continue to sit untouched for an extended amount of time and are not paid. Discount programs are not being utilized if a quick approval process is not leveraged.

In assessing and developing a strategy to address and resolve any of the above issues, Nitor Partners refers to seven key categories within the Invoice and Payment element:

  1. Invoice Workflows – A question that Nitor typically asks all clients is, How many different types of workflows are being managed?” Companies must consolidate all the different scenarios into a list of major transactions that is easily available for reference.
  2. Invoice Receipt – Ideally, all invoices should be received in one location, a central receipt area. The invoice receipts should be sorted by type, dollar amount, volume, and vendor. All involved employees and departments should be made aware of this classification process.
  3. Invoice Processing – In processing the hundreds or thousands of invoices companies receive at any given moment, it is important to have well-defined use cases listing various scenarios and how an invoice is processed in each of them. Some of the items that need to be considered are tolerances, tax decisions, and exceptions. It is also valuable to define the process and requirements for non-touch invoices as these can save significant time for AP coders and approvers.
  4. Payment MethodsThe payment channel should be an extension of the buying channel, therefore it is important to ensure the correct buying channel is initially selected Suppliers should then be segmented into logical groups with one or more payment methods selected for each group. Payment Methods are an area in which there is opportunity to strengthen supplier partnerships through discounts or supplier financing options.
  5. Cash Management – Partnering with Finance is an integral step of creating a smooth invoicing process. Lack of working capital is a common issue within companies and a strong alliance between departments can help create a better cash flow situation.
  6. Reconciliation – Aside from reconciling that the correct accounts have been invoiced properly, reconciliation allows for Supplier Optimization. While commonly thought that this process is about decreasing the number of suppliers, Supplier Optimization is, in reality, about correctly balancing supply and demand. It is important to determine the appropriate amount of suppliers necessary for different categories and commodities and which suppliers are the most likely to form a strategic relationship with the client.
  7. Regulatory – Efficiencies in regulatory reporting are a bi-product of more efficient invoicing and payment processes. In streamlining the payment process, companies are able to better account for invoices that are in process allowing for a more accurate reflection of accrued expenses. The streamlined invoice processing would lend itself to other advanced reporting, VAT compliance, etc…

Once invoices are automated and flow efficiently from the preceding steps, the information collected from the invoices should generate detailed data that flows back into spend analysis, strategic sourcing, category management, and the other elements to continue the cycle. Closing this loop in this process leads into our eighth and final element, Financial Management - how Procurement measures and reports on value. Stay tuned for the conclusion of the Nitor Partners 8-Element series and how to realize your company’s Procurement Transformation.

Molly Wilson
Analyst

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Topics: eprocurement

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